Why S&P Just Raised The Debt Outlook For New York State

S&P has lifted the debt outlook for New York State from stable to positive, meaning an actual upgrade is possible if trends continue.

The announcement explains the move. Basically, the state is moving towards balanced budgets, and has adopted schemes that will reduce future expenditures on school aid and Medicaid.

Below the line is the full announcement.

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NEW YORK (Standard & Poor's) Aug. 27, 2012--Standard & Poor's Ratings Services revised its outlook to positive from stable on New York State's general obligation (GO) and state appropriation secured debt.

At the same time, Standard & Poor's affirmed its 'AA' rating on New York State's state GO debt and its 'AA-' rating on the state's appropriation secured debt rating.

"We base the outlook revision on what we view as the state's movement toward structurally balanced budgets in the past two years," said Standard & Poor's credit analyst David Hitchcock.

New York State has, in our opinion, lowered projected future year general fund budget gaps due largely to recent restraint in school aid and Medicaid expenditure growth. We believe spending restraint will also be aided in the long term by the recent establishment of a new pension tier for new employees that will slow growth in pension costs. Should New York State continue to maintain largely structurally balanced budgets in the next two years, we could raise the rating.

The GO rating reflects what we view as New York State's:

Strong and diverse economy of 19.4 million people, with income levels above the national average, but with a higher-than-average proportion of state income derived from the financial sector; History of what we consider conservative budgeting, quarterly updated budget forecasts, active expense management in economically weak periods, and an established rainy-day fund, although it has not always been fully funded; Cyclical finances and strong surpluses in the immediately preceding years. At the same time, the general fund has been largely balanced on a cash basis; and Solid debt, swap, and capital planning management policies balanced against moderately high debt levels and large unfunded other postemployment benefits, although the state's pension system is relatively well funded on a generally accepted accounting principles basis. New York State's budget was approved by the legislature before the start of the 2012 and 2013 fiscal years and signed by the governor shortly after the fiscal years commenced. In previous periods of fiscal stress, the state sometimes had late budget adoptions, although even at that time we believe it made midyear budget corrections when necessary to preserve minimum levels of cash flow, such as the multiple midyear corrections in fiscal 2010.

The positive outlook reflects what we view as movement toward structural budget balance, following two years of essentially on-time adoption. In addition, New York State projects what we see as modest general fund projected budget gaps in future years. For example, the state only had to close a $3.5 billion budget gap as part of its fiscal 2013 budget adoption, compared with the projected $14.9 billion budget gap it had projected for fiscal 2013 when it began closing its fiscal 2012 budget. The lowering of projected outyear gaps is, in our opinion, largely due to recent restraint in school aid and Medicaid expenditure growth, which have been major cost drivers over time. Should the state continue to maintain structural alignment between revenues and expenditures over the two-year rating outlook horizon, we could raise the rating one notch. However, should structural balance prove elusive or financial performance deteriorates due to economic or federal funding changes, we could revise the outlook back to stable.